LONDON (Reuters) - British house prices fell 1.9 percent this month alone and retail sales dropped at their sharpest pace in at least 25 years, two separate surveys showed yesterday, adding to the gloom on the economic outlook.

The Nationwide Building Society said nearly £5,000 was wiped off the value of the average British home in August, leaving it 10.5 percent cheaper than at the same time last year — the biggest decline since comparable records began in 1991.

The property market is now plummeting, after 10 years in which prices trebled, as banks hit by the credit crunch have tightened their lending criteria with many now requiring a 25-percent deposit for mortgages.

Its fall is now reverberating across the economy with retailers and construction firms the hardest hit as the British economy possibly heads into its first recession since the early 1990s.

The Confederation of British Industry's monthly snapshot of the retail sector showed August was a washout. Sales fell at their sharpest pace since the series began in 1983 and retailers expected to fare little better in September.

"This has been a summer that many retailers would rather forget. The downturn in the housing market is continuing to depress sales for those shops selling big-ticket items," said Andy Clarke, chairman of the CBI's survey panel.

The pound has already been falling sharply on worries over the overall health of the British economy and expectations that the Bank of England, which is still worried about inflation, will cut interest rates sharply next year.

Sterling's trade-weighted index hit a 12-year low yesterday but for now interest rate cuts do not look imminent, even though one policymaker voted for raising rates this month because inflation is at more than double the BoE's target.

There were also signs yesterday that the higher cost of living is feeding into bigger pay deals — a key worry for the central bank which is terrified of inflation becoming entrenched in the system.

Incomes Data Services Pay Databank showed pay settlements produced an average deal of 3.5 percent in the three months to the end of July, down from an upwardly revised 3.6 percent in the three months to June.

But the upper quartile of deals rose to average 4.5 percent in July from 4.2 percent in June — the highest since October 2002 — and 14 percent of deals were 5 percent or more.

The CBI survey showed retailers still expected to raise prices sharply but at a much slower rate.

Still, most analysts expect the slowing economy will force the BoE to cut rates soon as the medium-term outlook for inflation weakens.

"What began as a fall in prices is fast becoming a housing crash," said George Osborne, economy spokesman for the opposition Conservative Party.

The plunge in new residential construction has already forced homebuilders to lay off hundreds of workers.

Earlier this week, Bovis Homes described trading conditions as the worst it had ever experienced while the country's biggest housebuilder, Taylor Wimpey, reported a £1.54 billion pound half-year pretax loss.